Summary: On March 5, Premier Li Keqiang delivered China’s 13th Five Year Plan (FYP13) to the 12th National People’s Congress.[1] Adopted on March 16, the FYP13 gives top priority to economic development and projects a moderately prosperous GDP growth rate of 6.5%-7% for the next five-year period. At the same time, the FYP13 caps carbon emissions and energy and water consumption, and sets forth clear goals for overhauling or eliminating inefficient, outdated, or overcapacity industries and production facilities, increasing renewable energy production, and developing green infrastructure.

Carbon Emissions

Under the FYP13, China aims to reduce carbon emissions by 18% from 2015 levels by 2020. The FYP13 aligns with China’s December 2015 pledge at the Conference of the Parties to the United Nations Framework Convention on Climate Change in Paris. There, President Xi Jinping affirmed China’s commitment to reduce total carbon emissions per unit of GDP by 60-65% from 2005 levels by 2030 and peak carbon emissions by 2030.[2] Although it does not reference the Paris Climate Agreement, which China has now signed, the FYP13 outlines strategic steps to accomplishing these interrelated goals.

Energy

Under the FYP13, China aims to reduce energy consumption per unit of GDP by 15% from 2015 levels by 2020. Compared to the 12th Five-Year Plan (FYP12), which sought to reduce energy consumption per unit of GDP by 16% and brought about a reduction of 18.2%,[3] this is a conservative goal. It is consistent, however, with the estimated 6.5%-7% GDP growth rate projected for 2016-2021, which is slower than the 7% growth rate projected in the FYP12.[4]

To reach this target, the FYP13 lays out a number of mileposts. First, it confirms that energy consumption per unit of GDP fell by 5.6% in 2015, and sets a further goal to reduce energy consumption per unit of GDP by at least an additional 3.4% in 2016. Second, it caps China’s total energy consumption – a measurement that has not been articulated in prior five-year plans – at 5 billion metric tons of standard coal equivalent by 2020,[5] a 16.3% increase in consumption from 2015 levels.

To meet China’s energy policy goals, energy production will shift from coal to renewables. China will upgrade some coal burning power plants to achieve ultra-low emissions and energy efficiency, but will also shut down coal-fired boilers that fail to meet national standards. The FYP13 reduces the use of untreated coal as well as the demand for coal by increasing electricity and natural gas substitutes. Indeed, the FYP13 emphasizes the country’s commitment to increasing renewable energy options. Over the next five years, China expects to increase natural gas supply and provide national government support for wind, solar, and biomass energy production.

Air quality

The FYP13 targets air pollution with goals to cut sulfur dioxide and nitrogen oxide emissions by 3% this year and maintain acceptable air quality levels in major cities for 80% of days by the end of 2020. To help achieve these objectives, the plan aims to increase forest coverage to 23.04% in the next five years and to restrict open burning.

A major component of China’s commitment to reducing air pollution and carbon emissions is redesigning its consumer vehicle market. The FYP13 seeks to expand the market for electric vehicles. It further sets forth a plan to construct urban parking lots, install charging facilities, and remove 3.8 million high-emission vehicles from roads. The FYP13 has set a goal that car gasoline and diesel fuel will meet “National V” standards, which provide specific reductions in maximum limits for sulfur and manganese and reductions in minimum octane requirements.[6]

Water

The FYP13 sets forth specific goals for water consumption and water quality. Most significantly, the plan aims to reduce water consumption by 23% from 2015 levels by 2020. China will also develop and upgrade urban sewage facilities. Water quality is targeted to improve through 2% reductions in chemical oxygen demand and ammonia nitrogen emissions. Wastewater treatment rates are set to increase to 95% in urban areas and 85% in non-urban counties. Finally, the FYP13 will curb water contamination from agricultural pollutants by providing for zero growth in chemical fertilizers and insecticides use in agriculture and from heavy industries by targeting reductions in and proper containment of waste ash.

Specific Steps

To reconcile the seemingly incongruous goals of increased economic development and reduced consumption, the FYP13 necessitates – and Premier Li acknowledged – a framework for “innovative, coordinated, green, open, and shared development.”[7] As such, the FYP13 provides for relaxed market access for private companies and shifts tax burdens to help stimulate a slowing economy. The FYP13 places State-Owned Enterprises (SOEs) on a more equal playing field with private companies by relaxing restrictions to market access for service sector companies and utilities, oil and gas, and electricity companies, while “upgrading” and improving performance of SOEs. SOEs and private companies will enjoy “equalized” opportunities for streamlined project verification and approval, financing, fiscal and tax policies, and land availability. Perhaps most importantly, the FYP13 introduces tax reforms for all industries and specifically encourages development for green finance through tax incentives.

China will also invest heavily in domestic infrastructure and energy projects. The FYP13 aims to invest more than 800 billion yuan in railway construction, 500 billion yuan in urban rail transit, and 1.65 trillion yuan in road construction.

In addition, the FYP13 places greater focus on growing China’s service industry, which produces fewer emissions than traditional heavy industry. The plan also addresses and eliminates overcapacity in steel and coal industries and provides for the shutdown of outdated production facilities. Furthermore, the FYP13 sets goals to upgrade manufacturing operations and promote green manufacturing.

In that regard, China’s National Development and Reform Commission and National Energy Administration recently announced that China will halt construction plans for 200 new coal-fired power stations that were projected to produce 105 gigawatts of power.[8] The country will continue, under the FYP13, to invest in major new hydropower and nuclear power projects. It also plans for a further increase in China’s domestic network of ultra high-voltage power transmission, smart grids, and pipelines for oil and gas transmission.

Finally, the FYP13 aims to modernize and standardize production from commercial agriculture. Streamlining agriculture will reduce overcapacity, and support China’s 2016 effort to turn 1 million hectares of marginal cropland into forest or grassland. It will also improve water quality by reducing to zero growth the use of chemical fertilizers and insecticides.

To seek to realize each of these targets, China will promote development of greater network-based information technology. It is anticipated that advancing information technology will drive efficiency in production and industry supply chains and help enhance conventional economic drivers in manufacturing and service industries. The FYP13 encourages greater crowd-sourcing, start-ups, and innovation to further spur network-based technology developments.

Beveridge & Diamond advises Chinese companies on the environmental considerations of doing business in the U.S. and, through relationships with a network of Chinese national law firms, on environmental issues faced by multinational companies doing business in China. Firm Principal Karl Bourdeau regularly travels to China and fosters dialogue among various stakeholders regarding China’s evolving environmental regulatory regime. For more information, please contact the authors or any member of our China Practice.

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